RFI report finds a responsible investment opportunity in combining ESG and Islamic investment screens
- Comprehensive research using 20 years of data finds no systematic performance penalty for investors using Shariah screens
- Results indicate that Shariah screens can complement ESG engagement strategies for responsible investors by providing a ‘margin of safety’ for lower-scoring ESG companies during investor engagement
- Performance outcomes are different across geographies and time periods, but overlap of best-in-class ESG screens with the Shariah universe is not generally the most effective
London, United Kingdom — 1 December 2021 — The Responsible Finance & Investment Foundation (RFI) released today a detailed quantitative study based on 20 years of data confirming the value of combining environmental, social and governance (ESG) data with Islamic investment screens. The study, conducted by RFI Foundation and INCEIF — the Global University of Islamic Finance — finds that Islamic screens have not created any systematic performance penalty for investors, and can be complementary to ESG screening practices.
The findings of the research identify differences in the way that ESG and Shariah screening complement one another in different time periods and across different geographical regions, enhancing the research conclusions’ relevance to investors who are purely focused on responsible investment. They also provide evidence that the screens used in Islamic investing can enhance investors’ returns under specific conditions that are likely to be important within many responsible investments.
The RFI’s results suggest that investors who are involved in engagement with lower-scoring companies can improve their performance by using features of the Islamic investment screening process. For example, by removing highly leveraged companies and reducing the sensitivity of the investment universe to adverse market conditions, investors may gain a ‘margin of safety’ during their engagement with companies that can reduce their financial risk while working with investees to improve ESG performance.
In addition to the relevance to responsible investment, the study also produced results of particular relevance to Islamic investors who are just beginning to integrate ESG considerations. One notable finding is that a simple overlay involving selecting the highest ESG scoring companies that also meet Shariah compliance screens is not always the most effective approach for generating investment performance. The use of these two types of responsible finance screens (Islamic and ESG) may be effective in some asset classes such as emerging market equities, but less effective in developed markets.
Blake Goud, CEO of the RFI Foundation, said: “We are excited to share this research, which is the most comprehensive look to date at how ESG investing and Islamic investing can complement one another. The RFI Foundation works to bridge the gap in responsible finance, and this paper represents a milestone in our knowledge of the links between Islamic finance and responsible finance. Through this research, we have demonstrated that not only do the values guiding responsible investment align with Islamic finance, we provide tangible evidence about how different types of responsible investment can complement one another in driving better investment outcomes.”
RFI Foundation will present the results of the research during a webinar organized jointly with Faith Invest, a network of faith-based asset owners. In addition to presenting the research results, the webinar will feature a presentation by Dr. Hurriyah El-Islamy, Executive Board Member for Indonesia’s largest hajj fund: Badan Pengelola Keuangan Haji (BPKH). Dr. El-Islamy will share the Islamic asset owner perspective on combining ESG with Islamic faith-based investing.
The research is available for download at http://www.rfi-foundation.org/research.